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There will be few places for investors to hide in Europe in the next few months as more worries about sovereign debt roil markets. But the United Kingdom could offer refuge in the short term, and Spain has long-term potential.

Yes, you read that right. Despite its well-documented problems, the Spanish market offers good long-term value, although there could be setbacks along the way.

Spain is adhering to a strict diet of austerity as it tries to rein in its budget deficit. Its international standing took another blow Thursday when Standard & Poor's downgraded its sovereign credit rating by two notches to triple-B-plus from A. Spanish stocks and bonds have paid a high price for the country's fiscal shortcomings in the past few months: The stock market gained 1.7% Friday, but has fallen almost 17% since the start of 2012. The yield on 10-year government bonds climbed to 5.87% Friday from 5.5% at the start of the year.

So, why the optimism? Asset valuations are low and Spanish companies offer exposure to fast-growing emerging markets in Latin America. For instance,
Banco Bilbao Vizcaya Argentariabbva -1.3962075848303392%Banco Bilbao Vizcaya Argentaria S.A. ADSU.S.: NYSEUSD9.8801
-0.1399-1.3962075848303392%
/Date(1425412779114-0600)/
Volume (Delayed 15m)
:
937271
P/E Ratio
16.96461089159938Market Cap
62526888070.6868
Dividend Yield
3.80626018977023% Rev. per Employee
436542More quote details and news »bbvainYour ValueYour ChangeShort position
(ticker: BBVA) reported Wednesday that it saw strong growth in Latin America in the first quarter even though its domestic operations were a drag. The bank's shares, which ended the week at 5.22 euros ($6.91), trade for just 5.9 times this year's expected earnings and offer a 4.8% dividend yield. The average price target is €7.13, according to a consensus of analysts' estimates compiled by FactSet, but the average rating is Hold.

Economists are encouraged by Spain's reforms, although you wouldn't know it from daily headlines. Its austerity targets corporations rather than consumers and closes loopholes rather than raising tax rates. However, the country needs a helping hand in the short term. The European Central Bank could buy Spanish government bonds or inject fresh liquidity into Spanish banks with another long-term refinancing operation. ECB President Mario Draghi suggested last week that euro-zone countries needed a "growth pact" alongside their belt-tightening policies. This was a clear message to policy makers that the central bank believes austerity alone won't snap the bloc out of its downward spiral.

That may be hard to swallow for Germany, which advocates austerity. But Europe's largest economy, which has dictated the euro-zone response to the sovereign-debt crisis, last week lost a key ally in fiscal discipline with the collapse of the Dutch government over a budget dispute. Another ally, French President Nicolas Sarkozy, is headed for almost certain defeat May 6 in an election runoff with socialist challenger François Hollande, who wants to temper austerity with measures to stimulate growth.

THE U.K. IS ATTRACTIVE IN THE SHORT term because it isn't part of the euro zone, its government has indicated it won't make deeper spending cuts this year, and exports are growing faster than imports. Domestic consumption is weak as inflation is high, and the economy slipped back into recession in the first quarter. But some economists are upbeat. "We are projecting that the U.K. is going to grow at the same level as Germany," says Christian Schulz, senior economist at Berenberg Bank in London. German GDP rose 2% in 2011.

Analysts at Cheuvreux upgraded the U.K. last week to Overweight and downgraded Germany to Neutral, contending security trumps valuation. U.K. equities have underperformed European stocks in 2012, gaining only 3.7% since the start of the year. German stocks are up 15.3%.

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UPM-Kymmeneupm1v.he 0.23682652457075193%UPM-Kymmene OyjFinland: HelsinkiEUR16.93
0.040.23682652457075193%
/Date(1425429000000-0600)/
Volume (Delayed 15m)
:
2084656
P/E Ratio
17.821052631578947Market Cap
9014795436.10859
Dividend Yield
4.134672179562906% Rev. per Employee
471026More quote details and news »upm1v.heinYour ValueYour ChangeShort position
(UPM1V.Finland). It reported last week that first-quarter operating profit fell less than expected, to €155 million from €198 million a year ago, and raised its expectations for the first half. That is a bold move, considering the industry has been in the doldrums for years, but UPM says profitability is heading in the right direction. Its Helsinki-traded shares closed Friday at €9.99. (UPM also has American depositary receipts that trade in New York.)

The stock fetches 10.2 times estimated 2013 earnings, according to FactSet, and a dividend yield of 6%. Deutsche Bank rates it a Buy with a price target of €13, indicating upside of 30%. Even that is well below UPM's 52-week trading high of €15.04. On paper, UPM is an attractive proposition.